Court Allows Reformation Of Doctors’ Policy, Rejects Coverage

The U.S. District Court for the Northern District of Illinois recently allowed reformation of professional liability claims-made policies to conform to the retroactive dates for additional insureds to the dates for the named insured, notwithstanding the insureds’ arguments that they relied on the original, more favorable dates.

The insurer was represented by Hinshaw & Culbertson LLP. Cunningham, Meyer & Vedrine P.C. of Warrenville and Goldstein, Fluxgold & Baron P.C., represented the insureds. Hallmark Specialty Insurance Co. v. Roberg, 2015 U.S. Dist. Lexis 116617 (N.D. Ill., Sept. 19, 2015).

Dr. Bradford Roberg procured professional liability coverage for himself and the medical group with which he was affiliated, Dr. Narendra Garg and Chicagoland Aesthetics, from Hallmark for 2012, 2013 and 2014. Each year Roberg was identified in the policy as the named insured and, by endorsement, Garg and Chicagoland Aesthetics as additional insureds.

Hallmark issued a policy each year on a claims-made basis with retroactive dates. The 2012 policy, which issued for the period Jan. 1, 2012, through Jan. 1, 2013, had a Jan. 1, 2012, retroactive date for both Roberg and the additional insureds. In the two subsequent years, for purposes of reducing premiums, Roberg requested that the retroactive date be reset to Jan. 1, 2013, and then Jan. 1, 2014.

For each 2013 and 2014 policies Roberg signed an acknowledgment that the new retroactive date would eliminate coverage based on claims for services provided before the retroactive date. The policies for these two years, as issued, reflected the new retroactive dates applicable to Roberg. However, the additional insured endorsements for Garg and Chicagoland Aesthetics continued to reflect the original Jan. 1, 2012, retroactive date.

In September 2013, Roberg performed a medical procedure on the underlying claimant, Avice Nelson. Shortly thereafter her attorney requested her medical records from Chicagoland Aesthetics. In March 2014 Nelson filed a professional malpractice action against Garg, Roberg and Chicagoland Aesthetics relating to her medical care.

The insureds tendered the Nelson complaint to Hallmark, and it filed this declaratory action in May 2014. Its complaint sought a determination of no coverage for any of the insureds based on the retroactive dates in the policy. Hallmark also sought reformation of the retroactive dates in the additional insured endorsements to conform to the dates applicable to Roberg.

Alternatively, Hallmark sought rescission of the 2014 policy based on alleged misrepresentations Roberg made in applying for the 2014 policy concerning his knowledge of potential claims. Both parties moved for summary judgment.

Analysis

In an opinion by U.S. District Judge Amy St. Eve, the court allowed reformation of the policies and entered summary judgment in favor of Hallmark. She noted initially that reformation under Illinois law may be available where there has been either a mutual mistake in contract language or a mistake by one party and fraud by the other.

As evidence of a mutual mistake here, St. Eve turned to Roberg’s signed acknowledgments for 2013 and 2014 in which he made known his understanding that neither he nor the “additional named insureds” would have coverage for services rendered before the reset retroactive dates.

The defendants claimed that Garg and Chicagoland Aesthetics were “additional insureds” and not “additional named insureds.” St. Eve nevertheless found that a separate notice attached to these policies, although not a part of the additional insured endorsements, contained broader wording that negated all coverage for services prior to the effective date of each policy, unless prior acts coverage was purchased.

In addition, she relied on deposition testimony from a Hallmark underwriter that the retroactive dates in the additional insured endorsements were a mistake and that Hallmark’s practice was always to issue the same retroactive dates for named insureds and additional insureds.

St. Eve found that the insureds’ evidence in opposition to Hallmark was insufficient to create a fact issue. She noted, for example, that testimony from the insureds’ broker – that the longer retroactive dates for the additional insureds may have been gratuitous “bonus coverage” in a soft insurance market – was wholly speculative.

The insureds also raised estoppel as a defense. But the main case law they relied on arose in the context of where the insurer claimed a mutual mistake in a policy but failed to either defend the insured or file a prompt declaratory action in response to an underlying claim, as required by Employers Insurance ofWausau v. Ehlco Liquidating Trust, 186 Ill.2d 127 (1999). In this case, by contrast, Hallmark filed a prompt declaratory action.

St. Eve further found a lack of evidence that the insureds detrimentally relied on the retroactive dates listed in the 2013 and 2014 policy endorsements.

They claimed, for example, that they relied on the coverage advice from their broker concerning the retroactive dates, but their broker testified that he did not know one way or the other what coverage the 2013 policy provided the additional insureds after Roberg submitted the 2013 application.

The court therefore granted Hallmark reformation of the 2013 and 2014 policies, finding that it owed no duty to defend any of the insureds or to pay a judgment or settlement on their behalf. The court found it unnecessary to address Hallmark’s rescission claim.

Key Point

Evidence of mutual mistake sufficient to allow reformation of insurance policy language may be based both on an insured’s acknowledgment of the actual coverage provided as well as evidence of an insurer’s established underwriting practices.